Don Cosenza, CLFP,
Chief Marketing Officer,
North Mill Equipment Finance

As an equipment finance broker, you’re at the center of a triumvirate. Strategically you sit between the customer, dealer/manufacturer and funder. It’s incumbent upon you to ensure that communication between all parties is fluid and accurate. This is especially crucial at the time of deal submission.

Regardless of whether your lender is a primary bank, secondary bank, fintech, captive or independent, optimally preparing and packaging your deal can make the difference between an approval or decline. And though each finance company has its unique set of credit parameters and associated policies, there are some basic things you can do in preparation no matter who underwrites the risk.

The 6 C’s of Credit

Whether you’re a seasoned broker or new to the industry, it’s prudent to periodically brush up on “equipment finance 101” fundamentals, especially the chapter on credit. Fully comprehending your lender’s credit box will result in more targeted submissions and may yield greater approval and closing rates. And the brighter these key performance indicators light up, the stronger your lender relationship becomes.

Perhaps it’s a coincidence that the word ‘credit’ is spelled with six letters, perhaps not. Either way, when it comes to equipment finance, the “6 C’ s” of credit set the foundation. Knowing and understanding them is essential. Everything you do ultimately connects back to them. Here’s a rundown:

Character, though a highly subjective evaluation, is the borrower’s personal history and provides the lender with an indication of whether that individual will repay the loan. Capacity is an evaluation of the borrower’s ability to repay the loan based on cash flow, payment history and contingent sources for repayment. Capital is the owner’s personal investment in their business which could be lost if the business fails (the single most common reason that new businesses fail is undercapitalization). Collateral, in the case of asset-based lenders, is the equipment itself that’s being financed. Conditions are an overall evaluation of the general economic climate and the purpose of the loan. Confidence ties the other five together as a successful broker/ borrower instills assurance by addressing all the lender’s concerns with the other five C’s.

Additionally, knowing how to read a credit bureau report (CBR) is of utmost importance. It may sound mendacious, but there are brokers in the market who haven’t made it a priority to understand a CBR and connect the dots back to the lender’s credit parameters. Take for example “revolver availability.” Simply put, revolver availability — a common credit variable considered by many lenders — is the percentage or dollar amount a borrower has available between all their revolving accounts like a credit card or a home equity line. In the middle of an Experian report you can find those accounts clearly listed as “revolving credit,” identifying limits, high balances and charge offs, and you can quickly determine if your customer meets lender requirements. And so, it continues for other credit variables. What’s more, you can also view public records such as liens, civil actions and bankruptcies — indicators that press pause for the lender.

One recommendation: Contact a credit analyst and ask them to review the funder’s credit box while simultaneously examining the CBR. That will certainly help connect the dots. Or better yet, visit the funder and ask what they’re looking for and why. “Better to hear directly from the lender what the perfect deal looks like — and then go out and find it,” Scott Wheeler of Wheeler Business Consulting, says. “There are two aspects of our industry that every broker must fully grasp. Credit is No. 1; financial analysis is No. 2.”

The Financial Picture

As Wheeler asserts, credit goes hand in hand with financial analysis. Before you consider which lender should get the deal, make sure you’ve done your due diligence and evaluate the borrower’s financials. While many lenders offer an “application only” product, which typically requires minimal documentation to adjudicate (usually a credit application and an invoice or spec), it often pays to provide more detail with the submission.

At North Mill Equipment Finance, for example, we offer both an application only and an “application plus” product which requires a financial package including bank statements and tax returns. These are typically larger sized deals that warrant further analysis. Lenders may want to see other financials like a balance sheet, income statement and cash flow statement which are written records that convey the business activities and financial performance of a company. As a broker, according to Wheeler, you should be able to interpret what those documents say about your borrower and how the lender may react to the information contained within.

“The biggest void in the broker community is the ability to understand financials and key ratios,” Wheeler says. “Lots of deals don’t qualify for an app only submission based on background. But there are brokers who shy away from full disclosure packages because of the extra time it takes to thoroughly analyze viability, primarily because they don’t know how to read and interpret financials. If you work in finance, understand financials.”

Wheeler recommends enrolling in a course at a local community college, or if time is a consideration, investing in an online master class. Nobel Prize winner Paul Krugman offers a course on economics in which he covers financial analysis. For a modest fee, Columbia Business School offers an online course on acquiring competence in financial accounting, planning, reporting and analysis. “Before you help a borrower invest in a piece of equipment, first invest in yourself,” Wheeler says.

Before You Submit: Know the Customer

As you consider the lender’s credit requirements and requisite financials, take your know-how and use it to extract critical data from your customer. Get to really know your borrower by asking questions. How did the business perform over the last three years? What’s the cash flow look like? Have there been any liens or judgements? How about character (remember the 6 C’s)? Some brokers build a list with three categories: character- related questions, financial performance-related questions and equipment-related questions. They make it a point, regardless of the deal’s size, to glean this information and draft a synopsis, or “write up,” on the borrower and the equipment and include this with the submission.

“I can never have enough pertinent information on a deal,” Bob Dion, senior vice president of credit at North Mill Equipment Finance, says. “We don’t auto- score here. We thoroughly review every deal, one by one. For my credit analysts and me, a detailed write-up helps avoid delays, like requests for more information, and even a flat out decline simply because we don’t have enough data to make a decision. We need input. Help me say yes.”

Wheeler says it all connects back to understanding credit, financials and where the twain shall meet. “So much of it boils down to leverage and how much a borrower can finance and remain solvent. As a broker, it’s worthwhile to analyze basic leverage ratios that represent the extent to which a business is utilizing borrowed money. Lenders consider these ratios to evaluate solvency and capital structure, particularly for larger deals and/or for customers who may have more challenged credit histories,” Wheeler says.

Wheeler says the ratios are not hard to calculate. By asking your borrower for data points like the business’ assets, debt, equity, annual EBITDA and depreciation expense, you can readily compute debt/assets, debt/equity, debt/ capital, debt/EBITDA and asset/ equity. Together, these metrics provide insight into how well a business is performing. Wheeler suggests interpreting the data and conveying it to the lender. “As the conduit between the customer and the funder, you’ll help avoid delays and frustration and determine eligibility.”

Dion underscores this notion. Recently, he received two deals for North Mill Equipment Finance’s Cash Out program, which allows borrowers to pull the equity from an unencumbered asset and use it as working capital. “One broker included a full financial package with a meticulous write up. He addressed the company’s financial performance and took the initiative to explain ‘dings’ in the credit report. Later that afternoon, another referral source submitted a Cash Out request. Alternatively, he sent us one appraisal for all the equipment owned by the business and asked us to ‘choose one’ to cash out. That’s all we got. There’s a big difference in how those deals were handled,” Dion says.

Before You Submit: Know the Lender

Most funders would agree that the most successful referral partners — those who have thriving brokerages with a bastion of repeat customers — embed in their mission statement the importance of “knowing” their lenders. Some new to the industry may miss the mark. Often, it’s those same referral agents who submit identical deals to multiple lenders. It’s not a practice that many lenders endorse. Instead, as both Wheeler and Dion suggest, treat each lender as you would a customer — individually. Know the credit box, the required financials, and lest we forget, equipment guidelines.

Know the Equipment

According to the Equipment Leasing and Finance Association’s 2022 Horizon Report, there are 16 different equipment verticals, ranging from transportation to materials handling to software. Knowing which assets your lenders accept is obviously salient, but familiarizing yourself with the parameters associated with that equipment also is essential. According to Dion, “Although the logic behind our broker portal auto-declines equipment that falls outside our purview, transactions that are out of scope still manage to come through.” Given that many brokers work with multiple lenders, Wheeler recommends creating a simple Excel spreadsheet. “Not only should you include equipment guidelines, compare credit boxes, products, policies and procedures — like submission requirements — it’s a great reference tool.”

Leverage Lender Technology

As Dion referenced with North Mill Equipment Finance’s broker portal, it’s well worth leveraging a lender’s technology before, during and after the packaging and submission process. While portals vary in sophistication by lender, some of them offer features like application submission through the portal itself, an overview of how well your book of business is performing and tools that facilitate the funding process. Should your lender offer a portal, engage the functionality.

Saving time is a key benefit that some portals offer. North Mill Equipment Finance’s Application Qualifier, for instance, is a precertification tool. By allocating two minutes to answer approximately 10 questions regarding the customer’s credit profile and the equipment being financed, a referral agent can quickly determine if the deal is eligible before taking the time to submit. This increases the user’s chances of getting the deal approved since the transaction was pre-qualified. Should the deal not fit inside the company’s credit box, the referral agent can take it elsewhere, avoiding hours of wait time and circumventing frustration and disappointment.

Preview Before You Submit

Once you have a clear understanding of your lender’s credit box and submission guidelines, if offered, leverage any pre-submission options. Some finance companies let you “preview” a deal before it’s submitted. Take advantage of the opportunity, but only after you’ve done your due diligence to ensure your customer meets minimum requirements. While lenders that autoscore are less likely to preview given their business model, other funders are open for discussion.

Now it’s Time: Package Up the Deal and Submit

You’ve done your homework. On a macro level, you dove into the principles of credit and financial analysis. On a micro level, you familiarized yourself with (and took the time to truly understand) your lender’s credit parameters, equipment guidelines and submission requirements. Finally, by asking questions and collecting data, you took the time to genuinely know your customer. As a successful referral agent, it’s a job well done. And although our industry is facing tough challenges like rising interest rates, supply chain disruption and compliance issues to name a few, there’s never been a more exciting, rewarding and financially lucrative time to be a player in the equipment finance arena. Being an expert in the field and forming deep partnerships with customers and lenders alike will help you better package deals and submit transactions that fit neatly inside each funder’s book of business.

ABOUT THE AUTHOR: Don Cosenza, CLFP, is chief marketing officer at North Mill Equipment Finance.